ECO102H1 Lecture Notes - Lecture 15: Monetarism, Money Creation, Open Market Operation

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19 Aug 2016
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ECO102H1 Full Course Notes
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ECO102H1 Full Course Notes
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Demand deposits: money held at commercial banks. Reserves: fraction of deposits held at the bank (not loaned: reserve ratio (rr) = reserves/deposits. Money supply: currency in circulation + bank deposits: change in money supply = change in currency in circulation + change in deposits, change in deposits = initial change in reserves/reserve ratio = initial change in reserves. Decision in asset division comes from the price of bonds (versus cash: price of bonds = present value = rt/(1+i)^t, interest earned on bonds is the price of holding money. Interest rates are inversely related to real gdp and the price level. Monetary equilibrium: money supply = money demand: ms = currency + deposits, md = f(i, y, p) Money market deposits the relationship between the interest rate (price of money) and quantity of money. Changes to the interest rate leads to changes in desired investment and consumption: leads to change in ae and ad.

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